The Rupee Remains Weak Following RBI Chief Resignation

The Indian Rupee continues to trade under pressure and concern remains about the Indian market. The recent resignation of Urjit Patel, the head of the Reserve Bank of India, is likely to continue to generate volatility. The government of Indian Prime Minister Narendra Modi clashed with the central bank and was concerned about the way monetary policy was restricting economic growth. The Prime Minister has been verbally barbing with the RBI since the summer. Last week’s soft GDP report was likely the straw that broke the camel’s back.

On December 10, Urjit Patel, the head of the RBI, who has been the head of the central bank for more than two years resigned amidst the standoff with the Prime Minister’s government. The central bank’s conservative policy that focused on inflation has reduced growth which has slowed GDP down to 7.1% year over year in the Q3 compared to 8.2% for the Q2. The resignation provides an opportunity for Prime Minister Narendra Modi to appoint a new head of the RBI. It will likely be someone who will employ policies that are in line with the government’s agenda.

The departure of the central bank head raises investor concern about future monetary policy and crude oil trading. The regulatory authority is also now called into question and whether there will be the necessary oversight to keep banks in line.

The issue between the central bank and the Prime Minister’s government stems from policy restraint. Last week, India’s central bank has held interest rates unchanged at 6.5%. This was widely expected by the markets. Additionally, the central bank maintained its tightening bias with is goal targeting 4% inflation and a band that is 2% above or below this level.

The RBI also reissued its forecast of growth and inflation. The RBI sees inflation between 2.7% and 3.2% into the Q1 of 2019 and inflation as high as 3.8% to 4.2% in the second quarter. It is the RBI’s estimate of inflation that is keeping the tightening bias despite growth continuing to slow. The monetary policy decision comes following news that GDP increased by 7.1% in the third quarter, down from 8.2% in the second quarter. Decelerating growth is a concern for the Modi government and they will likely nominate a new RBI chief that is focused on both growth and inflation. The RBI sees growth down to 7.4% year-over-year for 2018.

In November, it appears that Mr. Patel had conceded some ground to the government. The RBI had announced that it would reassess the reserves held by banks to stimulate lending and drive up growth. The government had been pushing the RBI to increase liquidity and stimulate the Indian economy. The goal was to set up an expert committee to assess reserves management creating a framework for state-owned banks. The markets are now left with a situation where the RBI caved to the will of the government and it’s clear to investors that there is a lack of independence at the RBI.

About the Author: The article is contributed by Aqib, who is passionate about green and clean technologies around the world.